Lotte Shopping Co., Ltd. (A023530) Earnings Call Transcript & Summary

[Foreign Language] Good morning, and good evening. First of all, thank you all for joining this conference call, and now we will begin this conference of the Fiscal year 2023 Third Quarter Earnings Results by Lotte Shopping. This conference will start with the presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2023 third quarter earnings results by Lotte Shopping.

[Foreign Language] Good afternoon, ladies and gentlemen. This is Ji Hwan Seol, Head of Investor Relations of Lotte Shopping. Thank you for joining us in Lotte Shopping's fiscal year 2023 third quarter earnings conference call. Today, we have Mr. Ho Joo Chang, Executive Vice President and CFO of Lotte Retail Headquarter; Mr. Won Jae Kim, CFO of Lotte Shopping; and relevant department heads of planning and strategy from major business units are present in this conference call. We'll proceed today's presentation in Korea first, and I'll also provide the explanation in English. Questions will be taken after the presentation. We do have a translator available, so please feel free to ask questions. I'll now begin with the highlights on Page 3-1 of the presentation. [Foreign Language] Page 3-1 and 2 is the highlights of 2023 third quarter earnings results. Lotte Shopping third quarter consolidated revenue was KRW 3.7 trillion, indicating 6.8% year-over-year decline due to domestic consumption slowdown and sales decline from subsidiary companies. Lotte Shopping's 2023 third quarter operating profit was KRW 142 billion, indicating 5.3% Y-o-Y decline. Hypermarket, Supermarket, E-commerce and Electronics units have shown increased operating profit performance, but the department stores, cinema and home shopping units have shown operating profit decline. 2023 third quarter consolidated net profit was KRW 61.8 billion. I'll now move on to Page 4 to explain about the financial summaries. [Foreign Language] On Page 4, you can find the summary of consolidated financial results. In the third quarter of 2023, Lotte Shopping's consolidated revenue was approximately KRW 3.7 trillion, indicating 6.8% year-over-year decline. Operating profit was KRW 142 billion. Quarterly net profit was KRW 61.8 billion. Just as a reminder, the consolidated financials include 35 affiliate companies. [Foreign Language] Page 5 is the brief financial summary of the major business units. Just as a reminder, others category includes the consolidated adjustments and other similar companies such as Lotte REITs and other consolidated subsidiaries. I'll now move on to divisional operations summary, starting from the Department Store operation on Page 6. [Foreign Language] On Page 6 is the Department Store unit. 2023 third quarter domestic Department Store same-store sales growth rate was minus 1.6%. The revenue has declined due to sluggish sales trend and falling winter collections, affected by abnormal climate condition and high base effect from the previous year. Domestic Department Stores' operating profit was KRW 81.7 billion, indicating KRW 27.2 billion Y-o-Y decline due to utility expense increase caused by the inflation. As for the Overseas Department Store operation, the revenue increased along with strong same-store sales growth rate of 8.7%, but the operating profit turned into deficit due to increased SG&A associated with the new store opening of Lotte Mall West Lake Hanoi in Vietnam. Lotte West Lake Hanoi quickly became a popular and must visit destination for the local millennial generations. Consequently, the initial revenue target has already been exceeded, and the site is receiving very positive feedback from the local customers. In domestic operations, we plan to regain market leadership in core locations through heavy renewals on flagship stores. As for the overseas operation, we have an ambition to become the #1 developer of premium complex shopping facility in South-East Asia, starting with the introduction of Lotte West Lake Hanoi in Vietnam. [Foreign Language] Page 7 is the Hypermarket unit operation. Domestic Hypermarket SSSG rate was 3% for the third quarter of 2023. Sales revenue has continued to grow with favorable sales trend in fresh and processed food category and also the liquor categories. Domestic Hypermarkets' operating profit was KRW 42.1 billion, indicating KRW 15.4 billion year-over-year improvement driven by gross profit margin expansion as well as the SG&A reduction. As for the overseas operation, same-store sales growth rate was 5.6% for the third quarter of 2023. And the operating profit have reached KRW 9 billion, indicating KRW 3.2 billion year-over-year increase. Operating profit margin of Vietnam Hypermarket already have reached 8.1% level, indicating a 2.4 percentage point increase year-over-year. We plan to position ourselves as the #1 premium grocery shopping place in Southeastern Asian market, further strengthening with the MD competitions. In particular, we plan to offer exclusive items to roll with the trending K-food product popularity in South-East Asian grocery market. [Foreign Language] Page 8 is the E-commerce unit. In the third quarter of 2023, Lotte E-commerce recorded KRW 31.6 billion of revenue, indicating 26.1% year-over-year increase driven by the GMV growth in both vertical platform as well as the [ pre-peak ] market. E-commerce unit's third quarter operating loss was minus KRW 23.3 billion, indicating KRW 14.5 billion Y-o-Y improvement. E-commerce unit has reduced its SG&A by 6.4% Y-o-Y through optimizing online grocery logistics expense as well as the IT service outsourcing cost reduction with the internal IT capability enhancement. E-commerce units will further strengthen the vertical specialized platform, mainly focusing on cosmetics, luxury, fashion and kids categories. We're expecting further profitability improvement through the ongoing initiatives. [Foreign Language] Page 9 has information about the Supermarket unit as well as the TV Home Shopping divisions. First, the Supermarket unit, 2023, third quarter, Supermarket same-store sales growth rate was 2%, F&B category have shown solid sales growth as a result of sourcing integration with Hypermarket. Operating profit also increased with SG&A reduction and gross profit margin improvement. Operating profit was increased by KRW 8.2 billion compared to the same period of last year, reaching KRW 13.9 billion. Next is the TV Home Shopping division. In the third quarter, Lotte Home Shopping's transaction volume has decreased by 13.2% year-over-year, and its revenue declined by 14.3% Y-o-Y, mainly due to proportional decline of higher-margin products and online portfolio reshuffling process. Lotte Home Shopping third quarter operating profit turned into deficit, decreased by KRW 28.8 billion compared to the previous year. Home Shopping plans to transform into a multichannel product provider beyond the conventional TV Home Shopping operator. We plan to differentiate our MD competitiveness by enhancing the product development process, initiate fostering and incubating the rising brands. We also aim to expand our new media commerce business through the strengthening of IP businesses going forward. [Foreign Language] Page 10 has the information about the Cultureworks and our -- Cultureworks and the Hi-mart, which is the electronic specialty unit. First, the Cultureworks. 2023, third quarter revenue of Lotte Cultureworks was KRW 154.1 billion, indicating 18.2% year-over-year decrease. In both domestic and overseas operations, revenue has decreased year-over-year due to the lack of blockbuster content. Cultureworks' third quarter operating profit was KRW 33.2 billion, reflecting a decrease of KRW 18.2 billion compared to the previous year, resulted by the declined sales and increased utility costs. We plan to enhance our content development and distribution business competitiveness through securing more popular IPs and strengthening partnership with global production companies. Next is the Hi-mart, our electronic specialty retail unit. Hi-mart's third quarter revenue was KRW 725.9 billion, indicating 16.9% Y-o-Y decline, mainly due to domestic economy slowdown and store restructuring process. Hi-mart's third quarter operating profit was KRW 36.2 billion, showing an increase of KRW 35.6 billion compared to the previous year with one-off profit recognition regarding VAT refund. [Foreign Language] Non-operating financial summary is provided on Page 11 of the presentation. 2023 third quarter non-operating loss was KRW 62.7 billion, indicating KRW 178.6 billion year-over-year improvement resulted with the gains on asset disposals amount of KRW 23 billion. The equity method gain amount of KRW 11.4 billion came from Lotte Card and KRW 2.2 billion from FRL Korea, which runs the UNIQLO business in Korea. I'll now wrap up today's presentation here. Thank you for attending today's earnings announcement. Now we'll begin the Q&A session.

[Foreign Language] [Operator Instructions] The first question will be provided by Younghoo Joo from NH Securities.

[Foreign Language] I have 2 questions in total. The first question would be for the Home Shopping division. So my understanding is that currently, the band on dawn broadcasting and such has been lifted, but still, we don't seem to have a full recovery momentum observed in the third quarter. I do want to just check if there were any additional variables that we have to consider in terms of expenses. And if you could provide some more color on the fourth quarter, that would be appreciated. The second question would be for the overall trend that you observed for the different units for the month of October. It seems that for the department store, in particular, compared to the competition, the performance in October that we observed is not that strong. So may I also ask, would there be any change to the full year guidance that you provided based on the current performance?

[Foreign Language] Yes. I will first answer the first question from the Home Shopping division. So if we look at the overall period that we had for the suspension of our broadcast, we had impact taken in terms of our sales, that was a decline of 5% Y-o-Y. Since the lift of the ban of the broadcasting, we do see the recovery of picking up what we lost from the month of August. In third quarter, though, we did have a one-off expense for restructuring that we had to take into account, which stood at KRW 2 billion. And compared to the previous year, there was a reverse base effect amount that we had to reflect of KRW 4 billion. And the Home Shopping characteristic that we have to consider is the undelivered products in terms of product delivery, finally to the customer. This year, the Chuseok Thanksgiving Korean holiday was at the end of September compared to the different periods in the previous years, which had an impact of undelivered products to the amount of KRW 4 billion. So we do believe that currently, the momentum we're seeing is that, in terms of the impact of the decline that we observed during the broadcasting ban period is being lifted and improving. And if we look at it on a year-to-date basis until the month of October, we have returned back to profit. So we see that the overall momentum is improving. [Foreign Language] I'll answer the second question, first from the Department Store unit. So if we look at the trend for October and our expected results after closing for the fiscal year 2023. So if we look at the month of October, because of the impact of the overall environment and also the high weather temperature in general, we did see a slowdown in terms of our fashion category performance. So we did record a slightly negative performance compared to the previous years. Though, we are trying to move things around, to turn things around from the month of November, really focusing on promotion and such activities on the fashion side, and we do observe that the momentum is returning back to a positive. In the month of December, we also think that there will be environmental factors at play, but last year and during the month of November and December, the growth rate was quite low. So compared to that, we do believe that this year, we will be able to grow in the coming months. And for the guidance and the target that we had set out for the full year, through various efforts to optimize our SG&A expenses and overall general expenses, we expect to be able to reach the target as set out. [Foreign Language] Next, for the Hypermarket. So as mentioned before, in terms of the Korean Thanksgiving holiday Chuseok, it was at the end of September this year compared to 2022. So right after the Chuseok holidays normally, which was the early period of October, generally, there is a decline or falling momentum in terms of sales activity. So that's why we did see overall in the month of October, a quite sluggish performance in terms of our sales trend. But since the end of October and moving on to November, we are seeing the consumption becoming more normalized, centering around fresh food categories and such. So we do expect that the positive momentum we'll keep up. [Foreign Language] Next for E-commerce. So as mentioned by the Department Store unit before, in the month of October, we also saw a sluggish performance in our fashion category, which led to overall sluggish performance as a whole. In the third quarter, though, as a whole, in terms of our GMV, it did increase 5% Y-o-Y. And in the month of November, it increased by 13%. So on a full year basis, we also expect that it will grow in into a positive territory and expect that momentum to continue. [Foreign Language] For Hi-mart, so we do see definitely a decline in terms of overall sales for the durable goods and consumable goods as well and we don't see an easy path to recovery at the moment. And we believe that the months for October and November, as we see in the performance, will continue on in the further months to come without much change. [Foreign Language] Next, for Cultureworks. So during the month of October and November, we did not have much blockbuster or [ tempo ] releases to show in the theater. So we didn't really have a strong performance as a result. But in the month of November, so as we move into the month, at the end of November and also mid-December, there are some blockbuster releases that will come out. So Spring of Seoul and also Noryang. And for Noryang it is the case that we are the sole distributor. So we expect that the performance as a result will have much more of a positive result. [Foreign Language] And for the full year guidance and our expectations on whether we will be achieve -- able to achieve or not. So in the month of September, we had our CEO IR event. And at the time, the goal that was set forward was operating profit KRW 505 billion for the full year. And that was a number that was provided based on diverse simulation of different scenarios, considering the overall case of our -- the economy and the situation of the different divisional units and the economic circumstances as well. As we look into the performance of October, we do see from the Department Store unit more of a slowdown in performance in terms of consumption. So there are some challenges. But at this point in time, we don't see any reason to make any changes to the guidance as of now.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions] [Foreign Language] The following question will be presented by Lee Jin-Hyeob from Hanwha Securities.

[Foreign Language] So my question would be for the new opening of the site in Vietnam. So my understanding is that there would have been investment that has been executed for the opening of this site to the amount of KRW 112 million as such. But I would like to ask when do you expect the new site in Vietnam to turn profit? And would there be any, I guess, ideas for further expansion, either in Vietnam or the South-East Asian market in the next year? So if you have any plans for site expansion or opening of new stores for the next year, if you could provide some more information, that would be appreciated. The second question is regarding for the equity method gain and loss for FRL. It does seem that we have had a slight decline for FRL, are there any kind of background or more different factors that we should be aware of? Is it because of UNIQLO's performance was poor or were there any different factors?

[Foreign Language] Yes. You mentioned for Vietnam, we did open West Lake Hanoi in September of 2023. And it is performing better than our expectations. So according to the current performance, the sales is recording above 100% of the target that we set out. In terms of the operating profit, so when we will be able to turn profit, we're currently estimating with the current level of performance, that to be around 2025. The second question in terms of additional site development and expansion. We are continuing to -- we are planning to continue our presence in the Vietnam market. So we will be considering other sites for expansion, not only in Hanoi, but also Ho Chi Minh and potentially other cities as well that we will be keeping an eye out for potential opportunities. [Foreign Language] And for the second question, in terms of the equity method gain performance for FRL Korea. So if we take a look at the performance of UNIQLO in reference. So in the third quarter, there was some impact that we took from the previous No Japan type of campaigns that went out. And as -- because of a loss of such No Japan campaigns and trend, there was an impact that we took as a profit in terms of our corporate tax -- income tax, and there was a nonrecurring profit as a result that we were able to reflect. In terms of the actual performance of sales of UNIQLO, it did improve slightly compared to the previous quarters.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions] [Foreign Language] The following question will be presented by Lee Jin-Hyeob from Hanwha Securities.

[Foreign Language] I do have another question for E-commerce. So you did mention in your previous answer that you are seeing strong performance in terms of growth for the month of November. If we take a look at, though, the overall range of operating loss that's recorded. Last quarter, it was around KRW 23 billion. This quarter, it's around KRW 23 billion. So it does seem to be in the range of KRW 20 billion. So would it be right to expect that in the fourth quarter it will continue to be in that range of KRW 20 billion in operating loss? Is there any potential upside to that number? And if you do have an expectation in terms of when the BEP can be reached, if you could share that, that would be great.

[Foreign Language] For E-commerce, so we did seen significant improvement in terms of our operating loss amount since the fourth quarter of last year. And so moving on to the fourth quarter of this year, we don't expect that there will be as significant of a reduction of the operating loss size that we observed in the previous quarters like the first, second and third quarter. So it will be in the range of KRW 20 billion. So I think, though, as to full year, we expect that in terms of the absolute size of the operating loss, it will be about half compared to the previous year. In terms of our expectations for our BEP, we are continuously trying to expand and build up our vertical business and are working on a lot of structural optimization as a result. The current expectation for our BEP point will be 2026. So since 2022, we have been making a lot of efforts to shore up our vertical platform and it's been growing quite strongly. And a lot of optimization efforts have been also made to improve the margin side as well. So we expect that moving on to next year and the year after that, we will be seeing a lot of the results of what we have been working on. And we will try to keep with the BEP period of 2026 as we have set out to achieve.

[Foreign Language] The following question will be presented by Joo Younghoo from NH Securities.

[Foreign Language] Just a simple clarification question. So if we look until the year-to-date performance until the third quarter, it seems that in terms of the net profit, we're currently recording about KRW 230 billion. So there might be some variables that we need to take into account for the fourth quarter to get a better idea of the full year. So are there any things that we should expect on the size of the non-operating profit so that we can have more, I guess, accuracy in terms of the full year picture.

[Foreign Language] Yes. So in the fourth quarter, we always had an impact from asset impairment on the non-operating side. So as of now, we're currently carrying out various simulations to evaluate the exact impact. We can't share at this moment in time exactly how much that asset impairment amount will be. But looking at the current situation, our internal estimate is that it won't be as unfavorable or a huge amount compared to the previous year.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions] [Foreign Language] Currently, there are no participants with questions. We will wait for a second until there is another question. The following question will be presented by Park Eun Kyung from Samsung Securities.

[Foreign Language] The question would be for the Supermarket unit. There seems to be some deviation or difference in terms of the gross profit margin number. So if you could provide some clarification on that and also some expectations moving on to next year?

[Foreign Language] Yes. The question on why there is a difference in terms of the gross profit margin between the Hypermarket and the Supermarkets. So the key difference would be that for the Supermarkets, we have different type of operations. So there are the directly operated stores and the franchise type of operated stores. So in terms of our direct operated stores, if we look at the improvement in terms of the gross profit margin, it's also on par with the improvement that we see for the Hypermarkets that it's above 1%. But in the case of Supermarkets, as I just explained, they are a combination of the numbers considering also the directly operated stores and the franchise type of operated stores. So in terms of the overall GPM number that you see for the Supermarkets, it does seem slightly lower compared to the Hypermarkets. So -- but if we look at the trend moving forward, we believe that for the Supermarkets and Hypermarkets, there has been overall improvement in terms of the gross profit margin as a result of our integrated sourcing efforts this year, which we expect to be continued. And moving on to next year, there's also the expected positive impact that we will see from the infrastructure integration on the logistics side that we expect to also be as a potential upside. So in terms of the gross profit margin improvement, we expect that the trend will be quite similar to what we are observing now, and that's our internal estimate at the moment.

[Foreign Language] Currently, there are no participants with questions. We will wait for a second until there is another question. [Foreign Language] Currently, there are no participants with questions and to give your question. [Operator Instructions]

[Foreign Language] We will now finish today's earnings announcement. Thank you for joining today's conference call, and further questions will be answered if you contact IR team through individual meetings or give us a call. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]